- (1.) FOLLOWING question of law has been referred for opinion of this Court by the Tribunal, Chandigarh Bench, Chandigarh, "Whether in the facts and in the circumstances of the case, the Tribunal is right in law in holding that the credit balance in the Post Warranty Service Scheme is not liable to tax and if the answer to this question is in the negative, whether the whole sum of Rs. 4,19,661 or only Rs. 91,268 is assessable in the asst. yr. 1978 -79 -
(2.) FACTS noticed in the statement of case are that the assessee has been a dealer in Massey Ferguson Tractors for the District of Bhatinda. It received its quota from the manufacturers directly. The assessee's business was established since 1969. As per universal practice adopted by other dealers of tractors of various makes, the assessee had formulated a 'Post Warranty Service Scheme' under which the customers who were to buy tractors from the assessee, had the option of becoming members of the said scheme, which was bifurcated as Scheme 'A' and 'B'. The joining of the said scheme was absolutely voluntary. The two schemes, as per "Post Warranty Service Scheme" schedule, can be detailed as below : "Scheme 'A' - -6 'on the farm' or in workshop routine or emergency services per tractor per year. The subscription for this scheme is Rs. 200 per year or Rs. 300 for two years (payable in advance) on account of labour charges. Scheme 'B' - -6 'on the farm' or 'in workshop routine or emergency services with one engine overhaul per tractor per year. The subscription for this scheme will be Rs. 360 for one year or Rs. 540 for two years (payable in advance) on account of labour charges." There was no compulsion, pressure or obligation of any type on the customers to have opted for one or the other scheme. Though the main feature of the scheme was that after the expiry of six months from the purchase of tractor, during which period free warranty services were available at the cost of the manufacturers, the member could call for services which were to be rendered either at his farm i.e., that of the customer/member, or in the workshop of the assessee, depending upon the nature of the services to be rendered. The relevant conditions for these services were as under : "The contract will be valid for one/two years from the date of first post -warranty service. 2. This warranty shall be operative from the date of first service to be communicated in writing by the member. The member shall be entitled to claim refund in full, if he does not avail of the service under the scheme, provided no member shall be entitled to claim refund as a matter of right within three years of the date of contract. After expiry of three years, the member shall be entitled to refund of this deposit, on request. 3. Any job requiring dismantling of engine and overhauling, jobs will be done in our workshop only. 4. Materials spare parts, etc. as required will be charged extra or may be provided by the owner. 5. Any work done other than shown in the above scheme will be charged extra. 6. Should tractors be not released for servicing to our mechanic even though prior information of his arrival is sent, you will be debited with the actual travelling expenses of our mechanic." The assessee maintained two separate accounts for these deposits. The post -warranty services could be claimed by the members and the assessee was obliged to render the same during the stipulated period. In case no requisition of service was made at the end of one of two years' period, as the case may be, the member could opt for the refund of his deposit. However, if he gets any service, he was not entitled to any refund. But he could call for as many services as he required. If there was any credit balance at the end, it was taken by the assessee to its P&L a/c. According to the assessee, though the method of accounting adopted was mercantile but so far as receipts under the Post Warranty Service Scheme were not the income of the assessee but it was money on trust. Only after the stipulated period in respect of each member had expired, the excess could be taken to the P&L a/c. On the basis of consistently adopted system of accounting, the assessee carried over the balance in Post Warranty Service Scheme account at Rs. 3,35,721 to, which was added the amount received during the year under reference i.e. Rs. 91,260 and on the debit side there was only a refund of Rs. 7,320, which left the net balance of Rs. 4,19,661. On the strength of the scheme and on the basis of the method of accounting, the Revenue accepted the accounts till last year but for this year, for the first time, the ITO added the total amount of Rs. 4,19,661 in income of the assessee, holding that it was trading receipt and since it was not refunded, the same was liable to tax. He did not even see that the opening balance in this year itself amounted to Rs. 3,35,721 and only the increase in this year could be brought to tax.
(3.) ON appeal, the CIT(A) sustained the addition in respect of receipt during the year under reference but deleted the amount of Rs. 3,28,401 which was balance carried forward in Post Warranty Service Scheme Account for the previous year. The Tribunal upheld the deletion and also set aside the addition. It was held that the amounts were received by the assessee for services to be started after six months of the Post Warranty Service Scheme and refund could also be obtained within six months. For the earlier years, the Revenue accepted the mode adopted by the assessee. Receipt was not the sole test of taxability. The amounts received were not free from encumbrances. The assessee, had provided for the contingency which may be required to be kept, and, therefore, the amount could be kept under separate account. Learned counsel for the Revenue submitted that the view taken by the Tribunal is not correct. The amount shown to the credit balance of customers represented surplus in the hands of the assessee which had the character of income.;